Trickle-down economics

Tuesday

Jan 29, 2008 at 12:01 AM

NEW YORK (AP) - Itís hard to feel sorry for well-heeled shoppers whose idea of tough economic times is passing on $1,000 Burberry raincoats or that $300 limo ride while the working poor skimp on vegetables and take the bus.

But economists say recent signs of cutting back by the affluent could hurt the economy and deliver even more pain to lower-income workers dependent on their business and fat tips.

Nathan Warren, a limo driver, knows this firsthand: He has seen his monthly wages drop by 40 percent to about $1,800 since late last year. His work week at Newport Beach, Calif.-based Classy Ride Limousine Service was reduced to three days from five amid slow business.

"I have to struggle to get by. I am pinching pennies," said Warren, 30, a Costa Mesa, Calif., resident. "I am eating more cereal and am not buying clothing."

Cutbacks by the wealthy have a ripple effect across all consumer spending, said Michael Niemira, chief economist at the International Council of Shopping Centers. Thatís because American households in the top 20 percent by income - those making at least $150,000 a year - account for about 40 percent of overall consumer spending, which makes up two-thirds of economic activity.

Niemira expects the retail sector, whose growth was fueled in part by strong gains at luxury chains, will struggle to eke out a 1 percentage sales increase in stores opened at least a year during the next few months. Thatís below the 2.1 percent average for 2007 and 3.7 percent for 2006.

Just look at the cutbacks by Dali Wiederhoft, a 52-year-old marketing executive from Reno, Nev., spooked by a volatile stock market, a 20 percent decline in her home value and recession fears. Over the past three months Wiederhoft pared her spending on clothes to $500 per month from about $3,000; that means no more Jimmy Choo shoes and David Yurman jewelry. Her cutbacks also included canceling the services of a cleaning woman and a lawn care company. She also plans to trade in her BMW for a Ford when her lease expires in about a month.

"This is a time to have cash, not to spend. So, Iím cutting wherever I can," she said.

Soaring home values made upper-middle class shoppers feel wealthy in recent years, causing them to trade up to $500 handbags and $1,000 espresso makers, but a housing slump has wiped away their paper wealth. The woes are creeping into even the high-end luxury sector, as affluent shoppers are rattled by the turbulence in the financial markets.

The economy needs affluent shoppers to spend with enthusiasm. According to the governmentís latest survey of consumer expenditures, the top 20 percent of households spend about $94,000 annually, almost five times the bottom 20 percent and more per year than the bottom 60 percent combined.

Then thereís also the multiplier effect. When shoppers splurge on $1,000 dinners and $300 limousine rides, that means fatter tips for the waiter and the driver. Sales clerks at upscale stores, who typically earn sales commissions, also depend on spending sprees of mink coats and jewelry. But the trickling down is starting to dry up, threatening to hurt a broad base of low-paid workers like Warren, the limo driver.